Turkey: The Impact Of The New Turkish Commercial Code’s Multi-Corporate Enterprise Concept On Securities Provided By Subsidiaries

The new Turkish Commercial Code1 (the
"New TCC") that was ratified by
Parliament in January 2011 and will enter into force on 1 July
2012, will replace the current Turkish Commercial Code2
(the "current TCC"). The New TCC
introduces the multi-corporate enterprise concept and controlling
company in this context,3 and includes certain
principles applicable to assistance that subsidiary companies
provide to their controlling companies for the purposes of
facilitating transactions undertaken by such controlling companies
("Subsidiary Assistance").

Subsidiary Assistance under the Current TCC

The current TCC does not include any specific provisions on
Subsidiary Assistance, and due to the absence of any specific
provisions, Subsidiary Assistance is subject to the general
provisions under Turkish law governing the so-called concept of
"undertaking the performance of a third party." Hence,
today, there are no rules prohibiting subsidiaries from providing
Subsidiary Assistance, including giving loans and/or securities for
debts of their parent companies. However, certain principles under
the current TCC have an effect on Subsidiary Assistance. For
instance, fiduciary duties of the members of the Board of Directors
(the "Board Members") require Board Members to ensure
that the transactions of the company are always conducted at
arm's length. Also, rules relating to the duty of care of Board
Members require Board Members to act as prudent company executives
while performing their duties. Hence, any decision by Board Members
to provide Subsidiary Assistance will be subject to evaluation by
the subsidiary's shareholders and creditors as to whether the
Board Members were prudent in making such decision.

Subsidiary Assistance under the New TCC

The New TCC aims to preserve subsidiaries from any kind of loss
due to the actions of the controlling company. Under the New TCC,
the relations between the subsidiary and controlling company are
devised for the sake of transparency, accountability, and balance
of interests for the first time. Therefore, unlike the current TCC,
the New TCC provides specific prohibitions for Subsidiary
Assistance.

(i) Subsidiary Assistance Provided by Controlled
Subsidiaries

Article 202 of the New TCC indirectly restricts subsidiaries
from providing Subsidiary Assistance to controlling companies. As
per this Article, controlling companies may not use their voting
power to force their subsidiaries to (i) carry out transactions
such as transferring their businesses, assets, funds, employees,
claims or profits (fully or partially) to third parties; (ii)
undertake liabilities as surety, guarantor or otherwise; (iii) make
payments to third parties; or (iv) adopt certain resolutions for
the purposes of transactions undertaken by their controlling
companies and causing the subsidiaries to incur a loss, by
decreasing the subsidiaries' productivity and by negatively
affecting their activities.4

That being said, Article 202 of the New TCC also provides a
relaxation procedure as an exception to its prohibition on
providing Subsidiary Assistance. According to the relaxation
procedure, the controlling company will not be deemed liable if it
compensates for the loss of the subsidiary or provides equivalent
claim rights within the same financial calendar year. Any of the
subsidiary's shareholders have the right to request
compensation for damages if the controlling company does not cover
the loss of the subsidiary, or does not provide an equivalent form
of compensation within the same financial calendar year. In that
instance, the controlling company's board of directors will be
liable together with the controlling company. Furthermore,
creditors of the subsidiary also have the right to request
compensation for the subsidiary's damages. Creditors may also
bring legal action to claim damages from the controlling company
and its shareholders if the controlling company fails to cover
Subsidiary Assistance-related losses of the subsidiary or to
determine the method of covering such losses within the same
financial year. Under the New TCC, compensation will not be awarded
where any Board Members acting in good faith and with a high level
of duty of care under the same conditions could have engaged in
such conduct (i.e. Subsidiary Assistance).

(ii) Subsidiary Assistance Provided by Wholly Owned
Subsidiaries

Despite the restriction applicable to controlled subsidiaries,
the New TCC sets forth a different regime for wholly owned
subsidiaries. According to Article 203 of the New TCC, the Board of
Directors of the controlling company – as long as its
specified and factual policies require – is entitled to
issue instructions regarding the management and direction of its
subsidiary provided that it holds, directly or indirectly, 100% of
the shares and voting rights of its subsidiary. In this case, even
if such instructions might result in loss for the subsidiary, the
management and other bodies of the subsidiary must comply with such
instructions. However, as an exception, Article 204 of the New TCC
provides that instructions that are of a nature which clearly
exceed the subsidiary's solvency, jeopardizes its existence, or
results in the loss of significant assets of the subsidiary, may
not be given.

Article 205 of the New TCC provides that the subsidiary's
Board Members, managers and other related persons may not be held
liable toward the subsidiary or the controlling company for
complying with the instructions in Articles 203 and 204 of the New
TCC. Furthermore, since the controlling company's management
may instruct its wholly owned subsidiary to provide Subsidiary
Assistance, it is possible to say that the New TCC enables wholly
owned subsidiaries to provide Subsidiary Assistance to their
controlling companies. Nevertheless, the controlling company and
its managers will still be responsible for damages incurred by the
subsidiary's creditors. According to Article 206, if the
controlling company fails to cover the subsidiary's loss
incurred as a result of the instructions given by the controlling
company or its management, or to determine the method of covering
such losses within one financial year, the creditors of the
subsidiary will be able to bring legal action to claim their
damages from the controlling company or its managers who are
responsible for the loss.

Effect on Security

In general, providing security on behalf of the controlling
company is a commonly used method of Subsidiary Assistance. The
regime applicable to providing Subsidiary Assistance under the New
TCC differs depending on whether the controlling company partially
or wholly owns the subsidiary.

When the controlling company enjoys Subsidiary Assistance
provided by its partially owned subsidiary, the material point to
be cautious about is the loss that may be incurred by the
subsidiary. As mentioned above, the controlling company shall not
be held liable, provided that it compensates for the loss of the
subsidiary or provides equivalent claim rights within one financial
calendar year. To that extent, if, through effective financial
planning, the controlling company ensures that benefit to the
subsidiary is not jeopardized, the subsidiary may provide security
on behalf of the controlling company. Under the New TCC, unless the
controlling company wholly owns the subsidiary, it will need to
assume more than its parental obligations and, now, must also be a
"brother's keeper" if it requests Subsidiary
Assistance.

However, if the controlling company wholly owns the subsidiary,
such controlling company will be able to instruct its subsidiary to
provide securities on its behalf, even if providing such securities
may result in loss for the subsidiary. The controlling company, in
this case, is still not entitled to give instructions to its wholly
owned subsidiary to provide security that may jeopardize its
existence or cause significant loss of its assets. Nevertheless, as
we mentioned above, the wholly controlling company and its managers
will still be held liable for the damages of its subsidiary's
creditors.

Footnotes

1. Law No. 6102, published in the Official Gazette dated
14 February 2011and numbered 27846.

2. Law No. 6762, published in the Official Gazette dated
9 July 1956 and numbered 9353.

3. The new TCC introduces a concept defined as a
controlling company under the section of multi-corporate
enterprise. As per Article 195 of the New TCC, if a company,
directly or indirectly, (i) controls the majority of voting rights;
(ii) is entitled to vote on the appointment of a sufficient number
of members to establish a majority in the management body; (iii)
has the capacity to exercise majority voting rights on its own or
with other shareholders arising out of a contractual relationship
entered into with the same; or (iv) controls another corporation
via a contract or in any other manner, it qualifies as a
controlling company.

4. This is a non-exhaustive list under the new TCC, and
similar acts will be considered within the scope of the said
Article's prohibition.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

The topic of corporate transparency through the creation of a central registry of company beneficial ownership information has been extensively debated in recent years and came to the political fore at the Lough Erne...

The Home Office has updated its Transparency in Supply Chains guidance (the "Guidance") that assists businesses in complying with the Modern Slavery Act 2015 ("the 2015 Act") requirement ...

Some comments from our readers…“The articles are extremely timely and highly applicable”“I often find critical information not available elsewhere”“As in-house counsel, Mondaq’s service is of great value”

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here

If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you
are granted a non-exclusive, revocable license to access the Website under its
terms and conditions of use. Your use of the Website constitutes your agreement
to the following terms and conditions of use. Mondaq Ltd may terminate your use
of the Website if you are in breach of these terms and conditions or if Mondaq
Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to
read the full text of the content and articles available (the Content). You may
not modify, publish, transmit, transfer or sell, reproduce, create derivative
works from, distribute, perform, link, display, or in any way exploit any of the
Content, in whole or in part, except as expressly permitted in these terms &
conditions or with the prior written consent of Mondaq Ltd. You may not use
electronic or other means to extract details or information about Mondaq.com’s
content, users or contributors in order to offer them any services or products
which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the
suitability of the information contained in the documents and related graphics
published on this server for any purpose. All such documents and related
graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or
its respective suppliers hereby disclaim all warranties and conditions with
regard to this information, including all implied warranties and conditions of
merchantability, fitness for a particular purpose, title and non-infringement.
In no event shall Mondaq Ltd and/or its respective suppliers be liable for any
special, indirect or consequential damages or any damages whatsoever resulting
from loss of use, data or profits, whether in an action of contract, negligence
or other tortious action, arising out of or in connection with the use or
performance of information available from this server.

The documents and related graphics published on this server could include
technical inaccuracies or typographical errors. Changes are periodically added
to the information herein. Mondaq Ltd and/or its respective suppliers may make
improvements and/or changes in the product(s) and/or the program(s) described
herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally
identifies you, including what sort of information you are interested in, for
three primary purposes:

To allow you to personalize the Mondaq websites you are visiting.

To enable features such as password reminder, newsletter alerts, email a
colleague, and linking from Mondaq (and its affiliate sites) to your website.

Mondaq (and its affiliate sites) do not sell or provide your details to third
parties other than information providers. The reason we provide our information
providers with this information is so that they can measure the response their
articles are receiving and provide you with information about their products and
services.

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to
view the free information on the site. We also collect information from our
users at several different points on the websites: this is so that we can
customise the sites according to individual usage, provide 'session-aware'
functionality, and ensure that content is acquired and developed appropriately.
This gives us an overall picture of our user profiles, which in turn shows to
our Editorial Contributors the type of person they are reaching by posting
articles on Mondaq (and its affiliate sites) – meaning more free content for
registered users.

We are only able to provide the material on the Mondaq (and its affiliate
sites) site free to site visitors because we can pass on information about the
pages that users are viewing and the personal information users provide to us
(e.g. email addresses) to reputable contributing firms such as law firms who
author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us
not to disclose your details to any of these parties, please tick the box above
or tick the box marked "Opt out of Registration Information Disclosure" on the
Your Profile page. We and our author organisations may only contact you via
email or other means if you allow us to do so. Users can opt out of contact when
they register on the site, or send an email to unsubscribe@mondaq.com with “no
disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate
registration form. This is a personalised service where users choose regions and
topics of interest and we send it only to those users who have requested it.
Users can stop receiving these Alerts by going to the Mondaq News Alerts page
and deselecting all interest areas. In the same way users can amend their
personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an
identifying user number. The cookies do not contain any personal information
about users. We use the cookie so users do not have to log in every time they
use the service and the cookie will automatically expire if you do not visit the
Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to
personalise a user's experience of the site (for example to show information
specific to a user's region). As the Mondaq sites are fully personalised and
cookies are essential to its core technology the site will function
unpredictably with browsers that do not support cookies - or where cookies are
disabled (in these circumstances we advise you to attempt to locate the
information you require elsewhere on the web). However if you are concerned
about the presence of a Mondaq cookie on your machine you can also choose to
expire the cookie immediately (remove it) by selecting the 'Log Off' menu option
as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example,
advertisers). However, we have no access to or control over these cookies and we
are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement,
and gather broad demographic information for aggregate use. IP addresses are not
linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or
its affiliate sites) are not responsible for the privacy practices of such other
sites. We encourage our users to be aware when they leave our site and to read
the privacy statements of these third party sites. This privacy statement
applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or
contests. Participation in these surveys or contests is completely voluntary and
the user therefore has a choice whether or not to disclose any information
requested. Information requested may include contact information (such as name
and delivery address), and demographic information (such as postcode, age
level). Contact information will be used to notify the winners and award prizes.
Survey information will be used for purposes of monitoring or improving the
functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our
site, we ask them for the friend’s name and email address. Mondaq stores this
information and may contact the friend to invite them to register with Mondaq,
but they will not be contacted more than once. The friend may contact Mondaq to
request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’
information. When users submit sensitive information via the website, your
information is protected using firewalls and other security technology. If you
have any questions about the security at our website, you can send an email to
webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode),
or if a user no longer desires our service, we will endeavour to provide a way
to correct, update or remove that user’s personal data provided to us. This can
usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will
post those changes on our site so our users are always aware of what information
we collect, how we use it, and under what circumstances, if any, we disclose it.
If at any point we decide to use personally identifiable information in a manner
different from that stated at the time it was collected, we will notify users by
way of an email. Users will have a choice as to whether or not we use their
information in this different manner. We will use information in accordance with
the privacy policy under which the information was collected.

How to contact Mondaq

If for some reason you believe Mondaq Ltd. has not adhered to these
principles, please notify us by e-mail at problems@mondaq.com and we will use
commercially reasonable efforts to determine and correct the problem promptly.

By clicking Register you state you have read and agree to our Terms and Conditions